Time Warner agreed to settle a civil action with the SEC, which had been hanging over the company's head for over two years, by agreeing to pay a $300 million civil money penalty. The investigation concerned the accounting for $400 million worth of round-trip transactions between Bertelsmann AG and AOL related to advertising. The SEC's Litigation Release (here) states:

Beginning in mid-2000, stock prices of Internet-related businesses declined precipitously as, among other things, sales of online advertising declined and the rate of growth of new online subscriptions started to flatten. Beginning at this time, and extending through 2002, the company employed fraudulent round-trip transactions that boosted its online advertising revenue to mask the fact that it also experienced a business slow-down. The round-trip transactions ranged in complexity and sophistication, but in each instance the company effectively funded its own online advertising revenue by giving the counterparties the means to pay for advertising that they would not otherwise have purchased. To conceal the true nature of the transactions, the company typically structured and documented round-trips as if they were two or more separate, bona fide transactions, conducted at arm's length and reflecting each party's independent business purpose. The company delivered mostly untargeted, less desirable, remnant online advertising to the round-trip advertisers, and the round-trip advertisers often had little or no ability to control the quantity, quality, and sometimes even the content of the online advertising they received. Because the round-trip customers effectively were paying for the online advertising with the company's funds, the customers seldom, if ever, complained.

The Commission also brought administrative proceedings against three Time Warner executives, including CFO Wayne Pace, and all entered into settlements and agreed to accept cease-and-desist orders, but will not pay any civil penalty or be barred from serving as an officer of a publicly-traded company (here).

The issue of round trip transactions has been a particular focus of the SEC since the collapse of Enron, and has recently come up in the investigation of accounting problems at Delphi (see earlier post here). (ph)